By Jan Schalkwijk, Guest Writer

JPS Global Investments

May 9th, 2008
Opportunities to invest in the water sector exist in three general areas: water as a source of power, the treatment of water for irrigation or human consumption purposes, and the efficient use & conservation of available fresh water sources. As sea levels rise and droughts in certain areas of the world increase, water scarcity is becoming an ever more urgent issue. Considering that the world’s bodies of water cover over 70% of the planet’s surface, one has to ask the question how we can use these large bodies of water; both for power generation and human consumption.

To-date technology has struggled with converting salt water to fresh water through the process of desalination. Desal plants have long faced opposition due to concerns over environmental impact and the significant expenses incurred to separate out the salt, to arrive at drinkable water. Only a small number of desal plants have been built to date, and most of them in the Middle East, where energy and money flow freely. Yet, it is undeniable that the oceans harbor an enormous potential to address the issue of water scarcity.

In the western Australian city of Perth, a desalination plant opened in 2006, is challenging the old barriers to a sustainable solution. The plant, which cost $360 million to construct, takes in 50,000 gallon a minute, to produce 25,000 gallons of drinkable water. This accounts for 20% of the city’s demand. The beauty lies in the fact that the plant is powered primarily by a wind farm. It is also able to run more cheaply than traditional plants, due to new technologies that separate the salt more efficiently. A second plant is under construction.

Meanwhile, back in San Diego, a similar project is in the works.

Connecticut-based Poseidon Resources, is attempting to build a desal plant, but is choosing the carbon offset route (along with some solar panels) to mitigate its green house gas emissions. Although the California Coastal Commission has tentatively approved the deal, several environmental groups are opposed, questioning the extent to which Poseidon will truly offset its carbon impact. Clearly, the key for successful desalination plants lies in making a solid case that cost and climate impact can be brought to acceptable levels. As far as investing goes, Poseidon is a privately held company and not accessible to the general investing public.

Besides drinking water, the ocean holds vast potential as a source of energy. Essentially, there are three sources of energy in the ocean: wave, tidal, and thermal. Wave energy applications harness kinetic wave energy to spin a turbine, which in turn drives a generator. Tidal energy is captured by building dammed reservoirs that take in water during high tide and let it out during low tide in a manner similar to a hydroelectric power plant. Finally, ocean thermal energy is created by the temperature differences in the ocean. Essentially, the concept is to build a heat engine that allows the flow of heat from the ocean’s surface (which is warmer), to lower depths (which are colder). The engine would convert some of that heat energy to work energy, much like an internal combustion engine.

That’s as scientific as I feel comfortable getting, so let’s discuss the market place for ocean energy. In effect, the market is still nascent. There are only a handful of investable companies. One is Finavera, a Canadian renewable energy company with wave and wind assets. Its wave power product is called the AquaBuOY. The company has developmental wave energy projects in Hawaii, Oregon, Canada, Portugal, and South Africa. Finavera has not yet made any money and is down over 55% year-to-date. Ocean Power Technologies (OPT), another company involved in wave energy, has only had marginally better performance, with a year-to-date showing of -34%. For the nine months ended January 31, 2008, OPT reported revenues of $3.7 million compared to $1.5 million in the same period last year, Though this is a 142% increase, its net loss has also increased over the same time period by 51% to $8.3 million. There are several other small players in the market. Perhaps the safest way to get involved would be through a larger renewable energy company with ocean energy assets. On the whole, however, it may be a safer bet to wait for this market to mature a little more before riding this wave.

In Holland, a country that has been claiming land from the ocean for over 4 centuries, other applications of water power have arisen. South of historic Amsterdam is a new section of the city called Zuidas, which has a high density of commercial buildings, including many IT companies. The city wanted the Zuidas district to use 40% less energy than the older sections in its effort to meet Kyoto’s greenhouse gas reduction targets. This was particularly challenging because of the large computer rooms that exist in this tech-heavy zone, which require extensive cooling. The solution presented itself through a nearby man-made lake called Nieuwe Meer.

Nuon, the local utility company, in collaboration with Capital Cooling Europe, a Swedish company, designed a system based on a process called District Cooling. It works as follows: water is channeled from the bottom of the lake, where the temperatures are lower than at the surface, to cool a secondary water supply, which is then pumped through pipes into the buildings. As the cool water makes its way through the pipes, it radiates cool air. This system requires only 10% of the energy of a conventional air conditioning system, and as such the savings are remarkable.

Though there is lots of activity in the water sector and exiting projects and applications are coming to the market, investment opportunities in pure-play water companies are limited. Veolia, a French company, is the de facto leader in environmental services related to water systems and waste water treatment and controls over 50% of the market. As they expand in eastern Europe and Asia, they are likely to benefit from a global demand for the water management services that it delivers. At JPS Global, I have recently initiated a position in this company. If the water theme gains traction, so will Veolia. Another way to participate, is through one of the water Exchange Traded Funds, I recommend proceeding with caution on that front, as the water indices are flooded with companies that have yet to produce any earnings. Harnessing the power of water is the wave of the future, but that wave may yet be a few miles offshore.